Deflation, an alternate look

[bart]

Given all the opinions and discussions surrounding what "total money supply" actually is and the confusion on whether we actually have disinflation or deflation, here's an alternate look at the area.






Very few disagree that M3 is a part of total money supply or that in the current environment and culture that credit itself is not money, per the basic definition of money as a medium of exchange. Credit in the above chart represents the total of the following types of credit: consumer, bank, credit card, real estate and commercial/industrial.

Federal government debt may not be, although I submit that it is, but even if it is not included in the above attempted proxy to actual total money supply, it just makes the chart more deflationary in the sense of less total money supply. I have also chosen to exclude any data on derivatives not only since its somewhat controversial but also its inclusion would make the above chart even more deflationary.

As covered here on iTulip in many places, debt deflation ( http://en.wikipedia.org/wiki/Debt_deflation ) does exist and the value of outstanding credit balances have unquestionably been dropping due to issues like the drop in housing and real estate values.

So, how do we try and represent the reality of debt deflation?

I've chosen to use 2/3 of the drop in the BKX, the Philadelphia Banking Index, as a conservative proxy for debt deflation.

As a specific example, two thirds of the BKX drop since its June 2007 peak translates to about 45%, so the current value of total credit is expressed in the chart as 55% of the actual total credit value. That translates to a debt deflation loss in dollars of about $9 trillion net in the credit portion of total money.



For reference, here's the same chart but without the BKX adjustment for debt deflation in the credit portion of the total.



The large very recent jump is mostly due to the huge leap in government debt.
The actual bottom was established the week of July 14th too, which correlates quite well with Finster's FDI.


One final note - neither chart covers either the concept of monetary lags or of velocity.

[FRED]

Another factor that appears to be strongly correlated are capital inflows. The most recent quarterly data are Q1 2008. Note that inflows drop off coincident with the decline in broad money you show.

I bet that when the latest data come out, we'll see a big surge in inflows due to repatriation of dollars back to the US by US funds corresponding to the rising measure of broad money you are picking up starting late summer 2008.

Taking bets on the updated flows number!

[$#*]

I bet that when the latest data come out, we'll see a big surge in inflows due to repatriation of dollars back to the US by US funds corresponding to the rising measure of broad money you are picking up starting late summer 2008.

Exactly as predicted by Fed's Hammer Drill theory. Fred, I completely agree with you on this issue.

[FRED]

Exactly as predicted by Fed's Hammer Drill theory. Fred, I completely agree with you on this issue.

Is your theory that the Fed is doing all of this on purpose?

[bart]

Another factor that appears to be strongly correlated are capital inflows. The most recent quarterly data are Q1 2008. Note that inflows drop off coincident with the decline in broad money you show.

I bet that when the latest data come out, we'll see a big surge in inflows due to repatriation of dollars back to the US by US funds corresponding to the rising measure of broad money you are picking up starting late summer 2008.

Taking bets on the updated flows number!

Indeed, and I also found it very interesting to see that it was "non official" flows that were mostly responsible for the recent drop.










Do you have an opinion on my attempt to show actual deflation in total money supply? Admittedly, its not exactly a conventional take for me to throw M3, credit and gov't debt together and call it total money supply... and these are far from conventional times too. ;)

By the way, a certain blogger with dubious journalistic abilities rejected this take on total money supply based (among other things) on the Austrian view that debt deflation is an invalid economic concept... regardless of how simply it explains what's actually going on. :eek: :cool:

[FRED]

Indeed, and I also found it very interesting to see that it was "non official" flows that were mostly responsible for the recent drop.

Do you have an opinion on my attempt to show actual deflation in total money supply? Admittedly, its not exactly a conventional take for me to throw M3, credit and gov't debt together and call it total money supply... and these are far from conventional times too. ;)

The challenge is that the correlations are all so complex, as you know, with lags and feedback loops. Like any complex system it's hard to model any part of the money system and get a clear sense of how the whole system is, or is not, functioning. We offered the super-simplified model below.

A critical limitation of this model is external money flows. Attempts at measuring levels of Mb for any part of the system that are available monthly or even daily is confounded by rapid rates of change in levels due to flows, which data are provided only quarterly. The truth is, no one knows. Why is gold spiking while TIPS appear to be broadcasting deflation out three to five years? Be thankful you are not the Fed trying to make live decisions in this environment.

By the way, a certain blogger with dubious journalistic abilities rejected this take on total money supply based (among other things) on the Austrian view that debt deflation is an invalid economic concept... regardless of how simply it explains what's actually going on. :eek: :cool:

The dogs bark and the caravan moves on.

[bart]

The challenge is that the correlations are all so complex, as you know, with lags and feedback loops. Like any complex system it's hard to model any part of the money system and get a clear sense of how the whole system is, or is not, functioning. We offered the super-simplified model below.

A critical limitation of this model is external money flows. Attempts at measuring levels of Mb for any part of the system that are available monthly or even daily is confounded by rapid rates of change in levels due to flows, which data are provided only quarterly. The truth is, no one knows. Why is gold spiking while TIPS appear to be broadcasting deflation out three to five years? Be thankful you are not the Fed trying to make live decisions in this environment.

Fair enough and quite true, especially about external flows and the Fed's extreme set of challenges... and stay tuned as I post more pictures of what I believe to be *real* total money supply.

Although that model of money flow is good, I also note that only three of the five elements in it are able to create money and all three of them are included and at least partially accounted for in my chart. And derivatives remain the major wild card in my opinion, mostly due to their lack of transparency and mark to model nature.

I also submit that there are sources for more frequent updates of external money flows type data (BOPI), but that it would be unwise to state them publicly, given how easily that various series like M3 have been discontinued.

Thanks for the feedback too.

The dogs bark and the caravan moves on.

Top quality pithy comment about that blogger.

[$#*]

Is your theory that the Fed is doing all of this on purpose?

The question is very difficult to answer in your formulation. To quote from classics:

That credit expansion put lots of new dollars into circulation, but only by lending them into existence. The result of such an inflationary process is to create an equal and opposite deflationary reaction, since lent money needs to be repaid. Just as dollars depreciated in value during the inflation, they appreciate during the deflation.

Basically the [usury- fractional_reserve_banking- government_enforcing (via the Fed)] scam (also known as Wall Street or US banking system), works based on inflation deflation cycles.

Inflation is needed to maximize the amount of usury (interest return) money-profit (creating bubbles and other asset appreciation transients-> too much money chasing to few assets) and the consequent deflation (too little money for the existing assets) insures the best bang for the buck (the usury profits can be buy assets at a firesale price).

From this point of view, you could say the banks controlling the Fed did this on purpose, but it's not like there was a dark room filled with smoke under the the statue of the Molok idol in the Bohemian Grove, where a few men in dark suits were saying: "We are going to create a dot-com bubble , and after that the housing bubble, and after that we will bring oil to $145.53/bbl..." etc etc. That is tinfoil hat stuff

This scam with inflation-deflation cycles to rob the people of a country of their wealth is as old as fractional reserve banking and usury. The whole thing is just the normal union in action of like minded and like net-worth people. It's more like keeping in line with tradition than a true financial coup. And it may be very well true that those who are doing it, have a twisted and sick form of patriotism, believing that what is good for their immense (and usually inherited) wealth it's also good for the Country.

We are talking about people born into families with a very long tradition of inbreeding into privileged, power and parasitic wealth. For them is like a perennial agricultural cycle: sowing the fields (with artificially low CB rates), growing the crops (economic boom + bubbles created through unjustified credit expansion) and finally harvesting time (deflationary crisis and buying the assets of the nation on the cheap, because they are the only ones with money when the credit crunch hits the economy).

Therefore one cannot say they are doing it on purpose. It's like saying that a leech that sucks the blood of a healthy organism does that on purpose. There is no "on purpose" here... that's the nature of a parasite.

[marvenger]

makes sense to me. And I thnk there's probably a mix of just going along with this ebb and flow and also keeping a close eye on the tides for the opportunities that it creates that borderline on corruption. I think you're also right that they probably think its justified as a whole as the tide is generally rising like ka-poom theory, the problem for everyone else is they are always periodically being left high and dry and having to work like crazy from scatch to build up their wealth a gain. There has to be a medium way.

[friendly_jacek]

The question is very difficult to answer in your formulation. To quote from classics:

Basically the [usury- fractional_reserve_banking- government_enforcing (via the Fed)] scam (also known as Wall Street or US banking system), works based on inflation deflation cycles.

Inflation is needed to maximize the amount of usury (interest return) money-profit (creating bubbles and other asset appreciation transients-> too much money chasing to few assets) and the consequent deflation (too little money for the existing assets) insures the best bang for the buck (the usury profits can be buy assets at a firesale price).

From this point of view, you could say the banks controlling the Fed did this on purpose, but it's not like there was a dark room filled with smoke under the the statue of the Molok idol in the Bohemian Grove, where a few men in dark suits were saying: "We are going to create a dot-com bubble , and after that the housing bubble, and after that we will bring oil to $145.53/bbl..." etc etc. That is tinfoil hat stuff

This scam with inflation-deflation cycles to rob the people of a country of their wealth is as old as fractional reserve banking and usury. The whole thing is just the normal union in action of like minded and like net-worth people. It's more like keeping in line with tradition than a true financial coup. And it may be very well true that those who are doing it, have a twisted and sick form of patriotism, believing that what is good for their immense (and usually inherited) wealth it's also good for the Country.

We are talking about people born into families with a very long tradition of inbreeding into privileged, power and parasitic wealth. For them is like a perennial agricultural cycle: sowing the fields (with artificially low CB rates), growing the crops (economic boom + bubbles created through unjustified credit expansion) and finally harvesting time (deflationary crisis and buying the assets of the nation on the cheap, because they are the only ones with money when the credit crunch hits the economy).

Therefore one cannot say they are doing it on purpose. It's like saying that a leech that sucks the blood of a healthy organism does that on purpose. There is no "on purpose" here... that's the nature of a parasite.

Good post, Symbols. This is exactly why I keep coming back to iTulip to find diamonds among weeds.

I would only add that it's natural to have the boom-bust cycles as everything is cyclical in nature. I'm not an engineer, but seems that any system with negative or positive feedback that exhibits lag greater than 0 will generate cycling.

[bart]

We are talking about people born into families with a very long tradition of inbreeding into privileged, power and parasitic wealth. For them is like a perennial agricultural cycle: sowing the fields (with artificially low CB rates), growing the crops (economic boom + bubbles created through unjustified credit expansion) and finally harvesting time (deflationary crisis and buying the assets of the nation on the cheap, because they are the only ones with money when the credit crunch hits the economy).

Therefore one cannot say they are doing it on purpose. It's like saying that a leech that sucks the blood of a healthy organism does that on purpose. There is no "on purpose" here... that's the nature of a parasite.

Very well put.

The "very best people" sometimes aren't, and their values sometimes are quite divorced from reality due at least partially to an education... that isn't. And "evil" does exist.

[FRED]

The question is very difficult to answer in your formulation. To quote from classics:

Basically the [usury- fractional_reserve_banking- government_enforcing (via the Fed)] scam (also known as Wall Street or US banking system), works based on inflation deflation cycles.

Inflation is needed to maximize the amount of usury (interest return) money-profit (creating bubbles and other asset appreciation transients-> too much money chasing to few assets) and the consequent deflation (too little money for the existing assets) insures the best bang for the buck (the usury profits can be buy assets at a firesale price).

From this point of view, you could say the banks controlling the Fed did this on purpose, but it's not like there was a dark room filled with smoke under the the statue of the Molok idol in the Bohemian Grove, where a few men in dark suits were saying: "We are going to create a dot-com bubble , and after that the housing bubble, and after that we will bring oil to $145.53/bbl..." etc etc. That is tinfoil hat stuff

This scam with inflation-deflation cycles to rob the people of a country of their wealth is as old as fractional reserve banking and usury. The whole thing is just the normal union in action of like minded and like net-worth people. It's more like keeping in line with tradition than a true financial coup. And it may be very well true that those who are doing it, have a twisted and sick form of patriotism, believing that what is good for their immense (and usually inherited) wealth it's also good for the Country.

We are talking about people born into families with a very long tradition of inbreeding into privileged, power and parasitic wealth. For them is like a perennial agricultural cycle: sowing the fields (with artificially low CB rates), growing the crops (economic boom + bubbles created through unjustified credit expansion) and finally harvesting time (deflationary crisis and buying the assets of the nation on the cheap, because they are the only ones with money when the credit crunch hits the economy).

Therefore one cannot say they are doing it on purpose. It's like saying that a leech that sucks the blood of a healthy organism does that on purpose. There is no "on purpose" here... that's the nature of a parasite.

I can understand how someone might develop such an argument based on observation but it is untrue. This is not how the system works. You are incorrect.

[marvenger]

How does it work then?

[FRED]

How does it work then?

Google: itulip retrospective

Read:
Jocks and Geeks Financial System Dysfunction

[xela]

Using 2/3 of BKX seems arbitrary to me, why not use something mortage related ala the Shiller/Case index as most debt-deflation should have happened in that field?

[bart]

Google: itulip retrospective

Read:
Jocks and Geeks Financial System Dysfunction

While jocks vs. geeks is workable, I don't believe it takes enough of the "evil" and power/control freak nature of a very small portion of humans into account.

[bart]

Using 2/3 of BKX seems arbitrary to me, why not use something mortage related ala the Shiller/Case index as most debt-deflation should have happened in that field?

It indeed is somewhat arbitrary. I also submit that the problems are primarily and at root in the financial system.

But be my guest and put something similar together with Case/Shiller. My intention was to show one possible real world picture of total money that takes debt deflation into account.

[$#*]

I can understand how someone might develop such an argument based on observation but it is untrue. This is not how the system works. You are incorrect.

Fred, I may be old school in matters of civility in a debate, but I'm not sure this style of reply, with a preemptive putting down of a partner in a debate and stating afterwards a laconic conclusion of your views as fact and absolute truth is very polite. Actually I believe it is outright rude.
It would have been polite if you would have indicated what exactly in my post do you believe was wrong, or why exactly do you believe my views were "incorrect". "You are incorrect" is not a polite answer, IMHO.

This is not the first time when you use this middle-low level management technique. Do you remember another unwarranted putting down on the subject of oil bubble?

On the topic of bubbles you are a tourist among tour guides. If you were in Paris but are not from Paris and you tried to tell your fellow tourists on a tour of the city where the back alleys go and the best place to go for foie gras, you can expect the tour guides to instruct your fellow tourists to regard your advice with caution. On topics that we are not experts on, however, we're all ears.

Considering that this kind of sharp dismissal was generated by my questioning of your assessment of the September 23 price action:
http://www.itulip.com/forums/showpos...&postcount=289

Back when this thread was opened it was originally titled "We have an oil bubble: the proof" which we changed to "Do we have an oil bubble?" because it's an important topic and deserves serious discussion for what it is, a question which can be argued several ways based on evidence not a fact for which there is any proof.

The oil markets delivered evidence yesterday to support our contention that oil is not a bubble.

Oil Prices Explode
September 23, 2008 (BusinessWeek)

Prospects for a weaker dollar and worries about the Wall Street bailout send investors flooding back into the oil market

Crude oil, the newest safe haven? Amid high-profile implosions on Wall Street and the prospect of massive new U.S. government debt, investors rushed into crude oil futures on Sept. 22, sending prices up a record 16% in one day. The price of a barrel of West Texas Intermediate crude oil surged more than $25, to $130 on the New York Mercantile Exchange (CME), before settling at $120.92. The one-session rise of $16.37 rise set a record.

Fred you cannot put other down another persona as "tourist" and portray yourself as a knowledgeable guide when you mistake a month end contract squeeze for a real bullish trend. It doesn't look good for you. Especially considering that right now "the oil market have delivered evidence" that the price of oil is $49.77/bbl. It looks like ... foie gras ...

It was my impression that a forum moderator is responsible for maintaining the atmosphere for a healthy, open and objective debate and exchange of ideas, not to pour gasoline on the fire with in-your-face dismissals attacks.

__________________________________________________ ______

Sorry Bart, for this unwanted off-topic, I'll try from now on to ignore Fred's "style" on this subforum. I wanted to ask your opinion about one of the latest entries in Brad Setser's blog:

Not a good sign: the Treasury once again can borrow for free

Posted on Thursday, November 20th, 2008
By bsetser
Ok, the Treasury can not borrow for free. Three month Treasury bills, according to Bloomberg, yield something like 2 basis point.




Treasury yields aren’t hard to calculate. But they are still my favorite indicators of the scale of the current crisis. The fact that so many are willing to lend so much to the US Treasury for so little is a clear indicator of a lack of confidence in other financial asset. Dr. Krugman is right. Market analysts are more or less saying the same thing: ““Where the credit markets are trading, it’s all but implying a 1929 scenario,” said Joe Balestrino, fixed income strategist at Federated Investors”
I can not match John Jansen’s market experience — but I share his amazement at the scale of the moves in the Treasury market today. Jansen:

The Long Bond is trading at a yield of 3.43 percent and the dollar price has exploded 9 points today. I have done this for nearly 30 years. I have never witnessed this before.

2 basis points ???!!!:eek:

[marvenger]

Yep, i think history has shown they sure as shit exist so its more than prudent to keep an eye out for their manifestations.

[bart]

I wanted to ask your opinion about one of the latest entries in Brad Setser's blog:

By bsetser
Ok, the Treasury can not borrow for free. Three month Treasury bills, according to Bloomberg, yield something like 2 basis point.


[chart]

Treasury yields aren’t hard to calculate. But they are still my favorite indicators of the scale of the current crisis. The fact that so many are willing to lend so much to the US Treasury for so little is a clear indicator of a lack of confidence in other financial asset. Dr. Krugman is right. Market analysts are more or less saying the same thing: ““Where the credit markets are trading, it’s all but implying a 1929 scenario,” said Joe Balestrino, fixed income strategist at Federated Investors”
I can not match John Jansen’s market experience — but I share his amazement at the scale of the moves in the Treasury market today. Jansen:

The Long Bond is trading at a yield of 3.43 percent and the dollar price has exploded 9 points today. I have done this for nearly 30 years. I have never witnessed this before.

2 basis points ???!!!:eek:

I have 3 month TBill rates going back to early 1934 and with few exceptions from then until late 1941, they paid 20 basis points or less, and did get down to 1 or 2 basis points at times.

From 1950 on, there were only 3 periods where they paid less than 100 basis points - 1954, 1958 and late 2003/early 2004 - and they never went below 58 points during those periods.

In other words, Brad Setser is correct - lack of confidence in other assets is quite the understatement.